Soft serve part of restructuring, but some analysts don’t agree with move

Below:

Latest market data

Stock search

Krispy Kreme will begin opening smaller locations that are less expensive to build than its older "factory store" model that allowed consumers to watch the doughnuts being made. The company plans to open the first of those stores in North Carolina and Tennessee during this fiscal year.

NEW YORK — Krispy Kreme's signature glazed doughnuts may be best hot, but its sales have been anything but in recent years. Now the chain is hoping that going cold — with its new soft-serve ice cream — will be the catalyst it needs.

The company has been trying to revive its sales for nearly three years, amid a health craze that made its glazed doughnuts an indulgence that many just couldn't stomach.

Now industry watchers say Krispy Kreme Doughnuts Inc.'s latest turnaround plan — which includes launching the new ice cream as well as opening smaller stores and expanding overseas — still may not be enough to help the chain climb out of its hole.

"They're trying to reposition themselves as more of a treat concept" that offers consumers desserts and indulgences, said Bob Goldin, executive vice president at food industry research firm Technomic. But "it'll be hard to argue it's a growth business" given trends toward eating healthier, he said.

The Winston-Salem, N.C.-based company replaced its chief executive with its chairman, James H. Morgan, in January to try to revitalize the management team. That followed years of losses as the company attempted to recover from allegations of mismanagement, bankruptcy filings of its franchisees and the resurgence of competitor Dunkin' Donuts.

Krispy Kreme's stock price has reflected the turmoil, falling to an all-time low of $2.23 earlier this year. The stock had been trading nearer to $50 at the beginning of the decade.

In the first half of the fiscal year that began in February, Krispy Kreme posted a profit of $2.1 million after reporting a $34.4 million loss a year earlier. But that gain was mainly due to a lack of one-time charges that had weighed down the prior year's results.

Sales actually declined 8 percent for that period and same-store sales, or sales at stores open at least a year, dropped 6.5 percent in the six months ended Aug. 3.

During the company's second-quarter earnings conference call, Morgan laid out his plans to regain the confidence of investors and analysts, who have largely dropped coverage of the company.

Morgan said Krispy Kreme will begin opening smaller locations that are less expensive to build than its older "factory store" model that allowed consumers to watch the doughnuts being made. The company plans to open the first of those stores in North Carolina and Tennessee during this fiscal year.

Spokesman Brian Little said the company is expecting the stores to perform well, particularly since it has used the model in its international locations and sales have been "very positive" there.

Internationally, the company has been expanding aggressively, adding 58 stores since February. More than half of its stores are now located outside the U.S.

Another key part of the plan is the company's new Kool Kreme soft serve, which will be featured with a toppings bar. The product is being tested in several stores around the country.

Whether the new offering will boost sales remains to be seen, but analysts have yet to be impressed — especially as Krispy Kreme's competitors are trying to attract health-conscious customers with egg-white sandwiches and whole-grain pastries.

"There's no question that Americans are changing their attitude about health as a way to add good things to your diet," said Harry Balzer, vice president of consumer research firm NPD Group.

Balzer said that although diners "will always have a desire for indulgent food," if restaurant chains want to stay competitive they must be responsive to the healthy eating trend.

Little said the "nutritional concerns of our consumers are always a consideration" but that the company sees its products as "an affordable indulgence" and one of "many sweet treats available to consumers worldwide."

Goldin said regardless of whether it speaks to consumers' desires, ice cream may not be different enough from other products already on the market. McDonald's Corp., for example, sells a soft serve treat for less than a dollar in some areas.

"I'm not saying it won't work, but how are you going to compete against that?" Goldin said. "I just don't think that's a product that's going to carry that well."

Still, he said, "they've got to do something."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.